The Joint Revenue Committee met last week to study one of its interim (between legislative sessions) topics, coal valuation.
Coal “valuation” means determining the value of coal for tax purposes. Coal producers pay a 7% severance tax for the privilege of taking the coal from the ground, along with a property tax of approximately 6%. Both the severance and property taxes take into account the reality that once the coal is mined, it is gone forever.
"Because Wyoming’s severance and property taxes are levied as a percent of value, the valuation of a mineral is important – greater or smaller valuations result in more or less tax revenue. "
Wyoming’s coal industry paid about $425 million in combined severance and property taxes on 2006 coal production of nearly 445 million tons. They also paid federal mineral royalties and coal lease bonuses that the federal government shares with Wyoming.
Because Wyoming’s severance and property taxes are levied as a percent of value, the valuation of a mineral is important – greater or smaller valuations result in more or less tax revenue. All the revenue is earmarked and supports current needs such as education, as well as future needs through the Wyoming Permanent Mineral Trust Fund.
Before going into the current coal valuation study, it’s useful to review the recent history of coal taxes and revenues.
- when the current coal valuation formula was adopted in 1990, the Legislative Service Office projected a loss of approximately $22 million for the fiscal years 1991, 1992, and 1993, based on previous collections
- expiration of the 2% coal impact tax in 1987
- expiration of the 1.5% capital facilities tax in 1993
- limitation of taxes on “high-cost” coal from 1987 forward
- when coal lease costs were reclassified in 2002 as a result of a coal industry lawsuit, revenue losses were estimated at $4 million/year in combined severance and property taxes; this figure has risen to over $10 million/year due to the huge amounts coal companies are bidding for federal leases (evidence of their confidence in future coal markets).
Coal valuation is arrived at by a formula that has been in place since 1990. The problem with the formula now, according to the coal industry, is that each coal producer pays slightly different taxes per ton of coal mined, depending on that producer’s costs. What the coal industry wants legislators to do is to pin the cost component of the valuation formula to a specific number set in state law, rather than allowing it to vary by producer. Pinning this component will effectively keep the cost component of the formula from increasing, thereby holding down coal valuations and tax revenues from coal.
The examples presented by the industry to show the effects of the present system are as follows:
Example A: Due to increased coal haulage distance and increased cost of diesel fuel and tires, producer has installed an overland conveyor system to transport extracted coal to the processing loadout facility. Implementation of the overland conveyor results in a $5 million annual savings in out-of-pit transportation costs.
Difference in taxes: Four cents per ton increase in combined severance and property taxes, assuming a coal price of $10/ton.
Example B: Due to increased production and an aging overland conveyor, crusher, and loadout, producer approves a $100 million upgrade of these facilities resulting in an annual depreciation expense increase of $5 million.
Difference in taxes: Four cents per ton decrease in combined severance and property taxes, assuming a coal price of $10/ton.
Example C: Due to a variety of reasons, the producer falls 5 million cubic yards behind in overburden removal compared to the actual coal shipped resulting in less coal than desired being uncovered in relationship to the actual coal shipments. $1 per cubic yard estimated cost to remove overburden.
Difference in taxes: Two cents per ton decrease in combined severance and property taxes, assuming a coal price of $10/ton.
Example D: After falling behind in overburden removal, the producer catches up the 5 million cubic yards to restore the desired relationship of uncovered coal to actual coal shipments. $1 per cubic yard estimated cost to remove overburden.
Difference in taxes: On this one, we have to go to three decimal places to get it: .0059 cent per ton increase in severance tax and one cent per ton in property tax, assuming a coal price of $10/ton.
These “inequities” in coal valuation simply reflect mine investment or management decisions made by the different producers – decisions made, by the way, to result in net increased revenues to their companies.
All of you business and home owners, are you with me here? If you complained about stuff like this, the state wouldn’t give you the time of day. The coal industry shouldn’t get the time either.